Gold: 2-Week Slide Tests Market’s Faith in This Critical Support Zone
AdamSummary:
Gold has slipped for two weeks after losing momentum near $4,000, pressured by a stronger dollar, easing geopolitical risk, and slower Chinese buying. Holding the $4,000 support is now key to trend direction.
Gold ended lower for the second consecutive week and has made a cautious start to this week’s action. Prices have been stuck around the $4,000 area in the last few trading days, hurt by a dollar recovery and loss of prior momentum.
The key question now is whether we have already seen a top or if this two-week drop is merely a blip. Much will depend on whether we will see continued central bank buying and the direction of the US dollar. But the weakness was long overdue, and in that regard, it is no surprise.
Gold’s Loss of Momentum
Over the past couple of weeks, the bearish momentum on gold has been evident following the reversal from those historic, extremely overbought levels. Some key levels have since been taken out, including most importantly, that psychological $4,000 mark.
While the initial breakdown below this level triggered a wave of technical selling and liquidation of long positions, the fact that prices have since recovered to climb back above here - albeit without any further upside yet – is mildly positive.
The key question is whether more losses will be on the way or whether prices will form a base around the $4K level now. The de-escalation in the US–China trade war is clearly a negative outcome for gold, while signs that inflation is slowing is also a reason why traders have been taking profit on their long positions.
The fact that the Fed chair said a rate cut in December is not a forgone conclusion that too is also a mildly negative influence on gold prices. The fact that global indices have recently hit new all-time highs, this too has also taken some shine off safe-haven assets like gold.
China’s Gold Buying Cools, but Demand Persists
Much of the strong Q3 central bank buying was driven by heightened geopolitical tensions, high inflationary pressures, and uncertainty around global trade policy, all of which fuelled appetite for safe-haven assets like gold. Some central banks like the PBOC, also wanted to diversify away from US debt.
While demand for gold has been clearly strong, the elevated prices we have seen consistently throughout this year might be a limiting factor for further central bank purchases.
Indeed, there was an apparent slowdown in Chinese gold imports recently. Last week’s data from Hong Kong showed that September’s net exports to China fell 17.6% month-on-month, signalling softer demand from the People’s Bank of China. However, with imports still above 22 tonnes, this moderation may suggest that the PBOC feels these high prices might have gotten too high, too quickly, rather than a fundamental shift in China’s reserve strategy.
One month’s data is hardly conclusive, and with official PBoC figures due in the next week or so, markets will soon have a clearer view of the central bank’s intentions.
Can Gold Make a Base Around $4K Handle?
Technically, the long-term chart of gold is still bullish. So, despite the recent drop, I’d wait to see what happens next before calling a top here, as betting against this rally has not worked well over the past year or so. If prices can hold above $4,000 for a while, that would be a strong bullish signal, suggesting the long-term uptrend remains intact.
But if gold struggles here and starts to head find itself more into the negative side of $4000, then it’s fair to say a short-term top might be in place, and we could see further selling until prices look attractive again… or until risk sentiment turns, and investors start looking for safety.
Some key short-term resistance levels to watch include $4045, then the underside of the broken trend line at around $4,100.
In terms of support below $4,000, well, the $3,970 level is the initial support, then last week’s low of $3,886 comes into play next. Below that, there are no obvious support levels apart from round handles like $3,800, $3,700, etc., until we potentially get all the way down to the April high of $3,500, now the most important long-term support.
Source : investing
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